Effect of Dividends on Options

[spindr0]

I collar many of my equity positions and I am comfortable and adept at managing and adjusting the positions as price changes so I'm not asking for suggestions about the strategy per se. I understand that this is equivalent to a vertical if all legs executed at once but I tend to put the collar on later. These are medium term investments rather than trading positions, usually 3-4 months out to capture two dividends.

If the underlying drops and I choose to defend, I'll roll the long ITM puts down to ATM or just OTM, perhaps increasing the number to somewhat maintain the net delta. I may roll the calls down as well if the next lower call strike doesn't compromise potential upside. While it's a slow losing battle if the underlying drops, it keeps me in the game, requiring a much more modest recovery to go into the black. If it drops sharply, the pyramided long puts will start to exceed the loss on the underlying. If it stagnates long term, I die a slow death from theta decay :->(

Dividends increase put premium and decrease call premium as an ex-dividend date approaches. The effect on each is balanced ATM and as the strike gets further from share price, it affects the ITM option more (eg. it affects the ITM put more than the same strike OTM call).

Given that the dividend effect is greater on ATM puts than on OTM puts, should I be considering rolling down to further OTM puts if I'm about to roll down and an ex-div date is pending? Is there a play here to minimize the put loss (from the dividend) or is this just much ado about nothing because the dividend effect isn't large enough to compensate for the extra slippage and higher number of lower delta puts needed?

Now that I'm delving into this subtlety, I realize that the program that I've been using isn't giving me proper numbers when there's a dividend, especially the IV. Is there a free, reliable calculator online that would show me the amount of option price change that the dividend causes?

 

[murray t turtle]

Given that the dividend effect is greater on ATM puts than on OTM puts, should I be considering rolling down to further OTM puts if I'm about to roll down and an ex-div date is pending? Is there a play here to minimize the put loss (from the dividend) or is this just much ado about nothing because the dividend effect isn't large enough to compensate for the extra slippage and higher number of lower delta puts needed?

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Yes;
Cash ETFs that pay you the dividend.[As far as a dividend on tech ETfs+ related, in the last quarter + 1st quarter= tends to trend strong, so i never worry about that................................................................................................................] Thanks

 

[jamesbp]

Now that I'm delving into this subtlety, I realize that the program that I've been using isn't giving me proper numbers when there's a dividend, especially the IV. Is there a free, reliable calculator online that would show me the amount of option price change that the dividend causes?

What program are you using that doesn't give you reliable data
... can you post an example to illustrate

Not quite certain that I understand the problem yet
... the expected dividends are already priced into the options

It would be easier ... mechanically and philosophically ... if you traded the positions as OptionsOnly ... or managed the synthetic position simply as a Vertical Spread ( which would open up other ideas / trades )

 

[spindr0]

Yes, dividends are already priced in.

What I'm trying to figure out is that if I have a somewhat delta neutral long stock collared position and a dividend is pending, am I better off with a more puts at a more OTM strike of fewer puts at a higher strike? I can't imagine that the dividend effect on premium is liner so I'm really deep in the weeds trying to figure out if there's a way to reduce the dividend effect.

I suppose that I could calculate the IV and premium per day for a series of strikes each day for a few weeks before a dividend but I was hoping that someone might have some insight into this so that I could avoid such a laborious task.

 

[spindr0]

I'd like to revisit this question but I'm not sure how to ask it.

Suppose I own appreciated stock. It's now at $66 and I have a target sell price at $70. If the EA was less than a month out and IV inflates nicely going into earnings. I might wait a few weeks and then sell inflated premium for a call just after the EA. Yes, I understand that share price could drop in the interim but my interest is in option pricing behavior. If it's a good EA, I capture the fat premium and maybe I get lucky and get a big pop post EA. If not, I'm back to B&H with a fatter premium in my pocket.

Moving on. Suppose I have a long stock collar and the stock has dropped below the strike of my long put. I want to keep the stock and I'm going to roll the put down, pulling out some put gain, lowering the stock's cost basis. Yes, the combo is losing money but much slower than uncollared stock. I might also roll the call down to keep premium flowing in but only if it still allows an acceptable gain if there's a sharp recovery. The stock is going ex-dividend shortly. As with the covered call example, does the premium effect from the dividend (puts inflate and calls deflate) affect my decision making process? IOW, is there any advantage to rolling the puts down before the dividend versus after it? TIA.

 

[Option_Attack]

Would rolling after ex div give a slightly better return on the put, because delta would be higher than a later expiry date? And of course if the rolled put is further OTM delta would be a bit less.

 

[spindr0]

Would rolling after ex div give a slightly better return on the put, because delta would be higher than a later expiry date?

That's what I'm trying to figure out. As I mentioned previously, I'm probably going to have to capture the details of a number of puts over the course of a a week or two before the ex-div date as well as on the ex-div date and then analyze the roll before and the roll after returns. I was just hoping that someone here might have some insight that would get me a little closer without all of the heavy lifting.

 

[Wheezooo]

Your question is a bit confusing, but I think you have already been answered by @jamesbp. The dividend is already priced in. Most people see a serial term in options and think it is the same underlying price as the stock being traded. It is not. The underlying price for each serial month has been adjusted by the model to already consider dividends and carrying costs.

 

[spindr0]

Your question is a bit confusing, but I think you have already been answered by @jamesbp. The dividend is already priced in. Most people see a serial term in options and think it is the same underlying price as the stock being traded. It is not. The underlying price for each serial month has been adjusted by the model to already consider dividends and carrying costs.

Yes, the dividend is already priced in, which is what I stated in my original question. So both of you answering with what I have already stated isn't an answer. I'm looking for some nuance as to the hierarchy of premium adjustment in regard to potential option position adjustments. So even though you don't understand what I'm asking, thanks for your reply.